Viewpoint

Make Health Insurance Cheaper for Small Employers

Rising costs for health insurance have been plaguing businesses for at least the last decade, when they began to climb after a seven-year period of stability. In 2010 premiums were more than double their 2000 levels, according to the Kaiser Family Foundation. The problem is most severe for small businesses, with the Small Business Administration reporting they pay 18 percent more than their larger counterparts for similar insurance.

The most common explanation for this disparity in cost is that small businesses don’t have enough employees to offset the risk that a few will prove costly to insurers. Another popular reason is that large businesses can escape costly state mandates by self-insuring and thus adhere to cheaper federal mandates, while companies with less than a few hundred employees don’t have enough people to self-insure.

Now a small group of economists is giving their assessment of the gap, linking it to the difficulty of comparison shopping for plans. An August 2011 article in the American Economic Review by two of my Case Western Reserve University colleagues and others says that the health insurance market’s opacity raises the cost for the average small business by nearly 30 percent. As any small business owner who has looked for an employee health insurance plan will tell you, it is nearly impossible to compare health insurance plans and determine the best deal. That’s because plans often have hundreds of options that provide different benefits.

Small business owners tend to change their insurance plans often, as they search for more affordable insurance. Not only does this switching impose costs on the businesses, but it also motivates insurers to take short-term approaches to health coverage for small businesses. For instance, insurers are reluctant to spend money on wellness programs for small companies because they aren’t likely to be their customers for long enough for the investment in wellness to generate a financial return. Since wellness programs are often the least expensive way to manage health problems, the long-term effect of this approach is to increase health-care costs.

Fixing the Problem

So what’s the solution? My former colleague, and a co-author of the American Economic Review paper, Jim Rebitzer, suggests using computer software to help small businesses to compare insurance plans. Currently the Centers for Medicare and Medicaid Services, which sets guidelines for insurers, requires policies to be compared across only three hypothetical patients. Rebitzer suggests small businesses should be given access to computer programs that compare thousands of policies on the basis of all of the small business’s health information. But that’s not so easily done. Who would create these programs? The insurers? The federal government? And who would pay for them?

Rebitzer also suggests limiting the role of insurance brokers. “Because brokers are paid by the insurers, they may recommend plans that give them the highest commissions rather than the plans that give their clients the best value for the dollar,” he wrote in an e-mail to me. Rebitzer believes that the best way to prevent this from happening is to set high required medical loss ratios—the fraction of premiums paid out as coverage. The bigger these ratios, the more difficult it will be for insurers to offer high commissions to attract brokers.

While Rebitzer’s solutions might work, they seem costly and difficult to implement. I would go, instead, with a very simple solution: require insurers to standardize health insurance policies—or at least dramatically reduce the number of policy alternatives—so that businesses could better compare them. That would go a long way toward reducing the high premiums small companies pay for health insurance.